The annual inflation rate in February continued its gradual cooling trend, though it remained well above policymakers’ target.

Inflation is a measure of how quickly prices are rising or falling in the U.S. economy.

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The consumer price index, a key inflation barometer, rose by 6% in February relative to a year earlier, the U.S. Bureau of Labor Statistics said Tuesday. The index accounts for price changes across a broad basket of consumer goods and services, in categories like energy, food, housing and entertainment.  

February’s reading was in line with economists’ projections. It follows a 6.4% annual gain in January and 6.5% in December, and was the smallest 12-month increase since September 2021.

“It’s still high, obviously,” Mark Zandi, chief economist of Moody’s Analytics, said of the annual inflation rate. “It’s slowly but steadily receding.

“There are some good reasons to be optimistic inflation will continue to fall back over the next year.”

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A positive but declining inflation rate doesn’t mean consumer prices are falling; it signals that they’re increasing more slowly.

Inflation will likely be close to 3% by year’s end, Zandi said. However, that estimate assumes the U.S. avoids recession, which would rein in inflation more quickly but trigger negative side effects like rising unemployment. Fear of this so-called “hard landing” scenario increased in recent days after failures in the banking sector, though regulators are trying to contain the fallout.

But it appears new car prices will soften as China reopens and supply chains normalize, housing inflation is poised to slow, and wage growth is cooling in the labor market — all of which should translate to tamer inflation, Zandi said.

Inflation was initially confined to physical goods like used cars and trucks. Goods inflation has retreated but has since spread to the services sector largely due to business’ high demand for workers, economists said.

That labor demand has put upward pressure on wages, feeding into higher services prices, said Paul Ashworth, chief North America economist at Capital Economics.

“That appears to be the bigger [inflation] factor now,” Ashworth said.

The U.S. Federal Reserve aims for a long-term rate around 2%. The central bank has been raising interest rates aggressively to tame inflation. Higher borrowing costs for consumers and businesses are expected to slow the economy, feeding into reduced demand for labor, slower wage growth and, ultimately, lower inflation.

The Fed is trying to manufacture a so-called “soft landing,” whereby by inflation slows but the economy doesn’t tip into a recession.

Fears of a “hard landing” have risen in recent days, after Silicon Valley Bank and Signature Bank failed, triggering concerns that the contagion could spread to other financial institutions. SVB’s failure was the biggest since the 2008 financial crisis and the second-biggest in U.S. history.

The federal government stepped in on Sunday to alleviate concern. Regulators backstopped uninsured consumer deposits at the banks and offered short-term loans to other institutions impacted by market instability.

“A lot of this is based on irrational fear,” Ashworth said of bank runs.

Inflation would come down more quickly in a “hard landing” scenario but at the expense of an economic downturn, he said. One example of how that could play out is if consumers continue to pull deposits from banks, constraining banks’ ability to lend money, thereby tightening credit for businesses, which might pull back on hiring, slashing confidence across the economy.

It’s too early to tell whether the government’s efforts will bolster consumer confidence and stem the contagion, or whether irrational behavior persists, Ashworth said.